The Financial Conduct Authority (FCA) has amended its proposal to mandate that in-scope* listed companies report against the UK Sustainability Reporting Standards S2 (UK SRS S2), the incoming set of sustainability disclosure requirements taking the place of TCFD in Annual Reports.
Instead, in-scope listed companies will now apply a comply or explain approach to their UK SRS S2 climate reporting. This aligns with the FCA’s approach to reporting on UK SRS S1 (general sustainability).
Following a consultation in early 2026, the FCA has decided that moving to a comply or explain approach allows reporters greater flexibility in the application of the UK SRSs, better accounting for the range of business model, strategy, and risk profile that exists between in-scope companies. The FCA also recognised the possibility that mandating UK SRS S2-aligned climate reporting would place a “disproportionate burden” on smaller companies without being meaningfully useful for the company or its stakeholders.
The FCA explain that this change will enable reporters to disclose only the most relevant and material climate information for their stakeholders, “rather than applying the standards mechanically in a way that could produce lengthy disclosures of limited value to investors”.
The shift towards reporting only what is financially material information for a company’s stakeholders aligns with a central concept behind the UK Government’s current Modernising Corporate Reporting (MCR) consultation.
When reporting against UK SRSs, reporters must now state:
There is no fixed date when companies are expected to move from ‘explain’ to ‘comply’, but the FCA expects companies to report on the climate-related matters that are financially material to each company. We expect that a greater number of companies will see climate become a material interest in the coming years and have to move towards greater compliance with UK SRS S2.
The FCA are currently consulting on a Technical Note to help companies understand the comply or explain approach (which runs until 28th October).
In scope issuers* will have to report against UK SRS S2 on a comply or explain basis for accounting periods beginning on or after 1st January 2027 (with the first impacted reports coming in 2028). Practically, this will impact any company that was previously required to report under the FCA’s TCFD-aligned disclosure requirements. Whilst TCFD is being subsumed by UK SRS S2, there is still a requirement to report in line with the CFD under the Companies Act, so reporters will have to ensure the additional requirements are met (whilst avoiding unnecessary duplication).
Reporters can report against UK SRS S1 on a voluntary basis for 2027 accounting periods but there is a two-year optional transitional relief for wider, non-climate sustainability disclosures under UK SRS S1.
Given the intentional overlap with TCFD, we expect to see the majority of mature reporters report against UK SRS S2 for 2027 accounting periods. However, the significant implication of the FCA moving to a comply or explain approach is that there is room for reporters to omit information that would be onerous or unduly burdensome to prepare.
For example, in practice this could result in companies omitting the financial impact that climate-related risks and opportunities have on them. This quantification would be, perhaps, the most material piece of climate information for investors and by allowing its omission the FCA has weakened the overall effectiveness of climate reporting.
Although the FCA’s move towards comply or explain creates greater flexibility for reporters of climate information, reporters should not see the move as an excuse for incomplete or opaque sustainability reporting. Investors may take a dim view of explanations of omitted information and what that could imply about a reporters’ data quality or governance. They expect to see proportionate information or robust, well-supported explanations as to why a disclosure requirement has not been met, paired with clear actions for how the reporting gap will be closed if a material gap has been identified.
For reporters unable to fully comply for 2027 accounting periods, programmes to plug the gaps will require structured governance of climate information. Owners for each material gap should be identified with clear internal plans for how they are to be addressed (more internal stakeholder involvement, expansion or refinement of data collection methods and review processes etc).
The aim of the UK SRS is to increase the levels of rigour and transparency in sustainability disclosures, bringing it closer to the standards expected of financial reporting. Investors and stakeholders increasingly expect to see reliable sustainability reporting on financially material issues from the companies they are interested in, regardless of whether the company can technically ‘explain’ why the information is missing.
In our view, although the FCA has softened its stance on mandating UK SRS S2 reporting, the level of granularity and transparency will still be expected from your stakeholders, your industry, and your raters and rankers.
No matter how material climate (and sustainability more generally) currently is to your business, the UK SRS are creating a new benchmark that your stakeholders will expect you to meet.
Companies should begin undertaking a structured UK SRS readiness assessment now, rather than wait for the first reporting cycle and trying to add compliant information into a report that is already taking shape.
This is where Black Sun can help. We’ve helped companies across the world benchmark their ISSB-preparedness, identify their key gaps, establish their material issues, engage the necessary internal stakeholders, and finally weave these disclosures into their reporting suite in a way that adds to, not detracts from, their unique corporate story.
If this sounds like something that could be of use, please don’t hesitate to get in touch:
Bob Crosbie-Dawson, Head of Business Development
bcrosbie-dawson@blacksun-global.com
* In scope issuers are companies with shares listed in the:
Read the FCA’s release here: PS26/19: Aligning listed issuers' sustainability disclosures with international standards | FCA
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